Most small business owners borrow from the first lender who says yes. Knowing the full menu can save you lakhs in interest.
Small businesses in India can raise money through bank and NBFC loans (about 9 to 24% p.a.), overdrafts and business credit cards for working capital, invoice discounting on TReDS for unpaid bills, equipment finance for machinery, government schemes like MUDRA and CGTMSE for collateral-free credit, loans against assets you already own (gold, property, mutual funds, shares, insurance), digital lenders for speed, and equity or crowdfunding if you want to share ownership instead of borrowing. The right pick depends on what the money is for, how fast you need it, and what you can pledge.
1What Should You Do Before Approaching Any Lender?
Get your paperwork in order, because it decides the rate you are offered. Register on Udyam (free), file GST on time, keep 6 to 12 months of bank statements ready, and check your own CIBIL score. Many lenders look for a score around 675 or higher and, for unsecured loans, two to three years in business.
2What Are the Main Finance Options for a Small Business?
| Option | Typical Cost | Collateral | Speed | Best For |
|---|---|---|---|---|
| Bank term loan | About 9 to 14% | Often yes | Days to weeks | Expansion, large purchases |
| NBFC or fintech loan | About 12 to 24% | Often no | 24 to 72 hours | Fast, smaller needs |
| Overdraft or cash credit | Similar to a term loan, interest only on what you use | Often yes | Days to weeks | Seasonal or uneven cash flow |
| Business credit card | Free credit period, then high interest | No | Days | Short, small purchases repaid quickly |
| Invoice discounting (TReDS) | Set by competitive bids, driven by buyer's credit | No | Fast once set up | Unpaid invoices from large buyers |
| Equipment finance | About 8 to 20% | The machine itself | Days to weeks | Machinery and vehicles |
| Government schemes | Often lowest, with guarantees or subsidies | Often none | Weeks | New and micro units |
| Loan against assets you own | Often lower than unsecured | The asset | Hours to days | Short-term gaps without selling assets |
| Equity, angels, crowdfunding | No interest, but you share ownership | No | Months | High-growth ventures |
The sections below explain each one.
3Should You Take a Bank Loan or an NBFC Loan?
Bank loans are usually cheaper, and NBFC loans are usually faster. Public sector banks commonly price MSME loans in the range of 8.75 to 11.5%, private banks around 9.5 to 14%, and NBFCs and fintech lenders around 12 to 24%, with unsecured loans costing roughly 3 to 5 percentage points more than secured ones.
Ask every lender for the full cost, since processing fees (up to about 2% at some banks, sometimes waived for small Udyam-registered units) change the real price. The central bank's Digital Lending Directions apply to app-based lenders, so confirm any lender is a bank or an RBI-registered NBFC before sharing documents.
4What Is the Best Option for Day-to-Day Working Capital?
An overdraft or cash credit limit suits most small businesses, because you pay interest only on the amount you actually use and can repay and reuse it. A business credit card works for small purchases you repay inside the interest-free period, but carrying a balance gets expensive quickly. If your cash gap is caused by slow-paying customers rather than growth, invoice discounting is usually the better fit.
How can you get paid early on unpaid invoices?
Use invoice discounting on TReDS, the RBI-regulated platform system for MSME invoices. You upload an invoice the buyer has approved, financiers bid to fund it, and you receive early payment while the buyer pays the platform on the due date. The three platforms are RXIL, Invoicemart and M1xchange. You need a Udyam registration, and your rate depends mostly on your buyer's creditworthiness, so selling to strong corporates or government bodies gets the best pricing.
5How Do You Finance Machinery or Equipment?
Take an equipment or machinery loan, where the machine you buy secures the loan. Most Indian SMEs pay roughly 8 to 20% p.a., with new machines getting better rates than used ones, and a fixed rate suits owners who want predictable monthly payments. Leasing is an alternative if you want to use equipment without owning it, and CGTMSE-backed lending can reduce the collateral you must offer.
6Which Government Schemes Offer Cheap Finance?
Government schemes are often the cheapest route for eligible businesses, especially collateral-free credit:
- MUDRA (PMMY) offers collateral-free loans of up to ₹10 lakh across Shishu (to ₹50,000), Kishor (to ₹5 lakh) and Tarun (to ₹10 lakh). MUDRA does not lend directly, so you apply at a bank, NBFC or microfinance institution, or through the Udyamimitra portal. The lender sets the rate.
- CGTMSE gives lenders a government guarantee so eligible micro and small enterprises can borrow without collateral. Budget 2025 raised the cover from ₹5 crore to ₹10 crore, as per the Press Information Bureau. You apply through a participating lender, and you should ask whether the guarantee fee is passed on to you. Helpline: 1800 222 659.
- PMEGP gives first-time entrepreneurs a 15 to 35% subsidy on project cost for new units, with projects up to ₹50 lakh in manufacturing and ₹20 lakh in services.
- PM SVANidhi gives urban street vendors collateral-free loans of ₹15,000, ₹25,000 and ₹50,000 in stages, with a 7% interest subsidy for timely repayment.
- Stand-Up India supports SC/ST and women entrepreneurs setting up new ventures with loans of ₹10 lakh to ₹1 crore. Check that it is open for fresh applications at your bank.
- SIDBI is the main development bank for MSMEs and also runs refinance and direct lending programmes.
Also look at your state government's MSME schemes, which often add interest subsidies or guarantees.
7Can You Borrow Against Assets You Already Own?
Yes, and it is often cheaper and faster than an unsecured loan, because the lender holds your asset as security while you keep owning it. Common choices are:
- Gold loans, which are quick and need little paperwork, and gold overdraft facilities, which can cost less than a standard term loan.
- Loan against property, which suits larger amounts and longer tenures.
- Loan against mutual funds, shares or an eligible insurance policy, which keeps your investments intact. Platforms like SLiQ offer these digitally, with rates starting from 9.99% p.a.
The loan value moves with the market, so keep a buffer. Under RBI's 2026 rules, money borrowed against shares cannot be used to buy shares or fund IPOs, but business expenses are fine. These loans are best for short-term gaps.
8What About Fintech Lenders and Peer-to-Peer Lending?
Fintech lenders offer speed, often approving unsecured loans within 48 to 72 hours using your GST and bank data, but they usually cost more. Peer-to-peer platforms, which are RBI-regulated as NBFC-P2P, connect you with individual lenders, and rates can run roughly 12 to 35%, so treat them as a backup, not a first choice. Always compare the annualised cost, not the monthly instalment.
9When Does Equity or Crowdfunding Make Sense?
Equity makes sense if your business can grow fast and you are happy to share ownership. Angel investors and venture capital give you money without monthly repayments, plus advice and contacts, but you give up a share of the business and some control. Crowdfunding lets many small backers fund you, which also tests market demand. For a steady shop, workshop or service business, debt is usually the better fit.
10What Are the Cheapest Options of All?
The cheapest money is often the money you already have access to: supplier credit (asking for 30 to 45 days to pay), advance payments from customers, and reinvested profits. These cost little or nothing, and they reduce how much you need to borrow.
11How Do You Choose?
Ask three questions in order:
- What is the money for? A new unit points to PMEGP or MUDRA. Unpaid invoices point to TReDS. Machinery points to equipment finance. A seasonal gap points to an overdraft.
- What can you pledge? If nothing, ask for a CGTMSE-backed loan before accepting a higher unsecured rate. If you hold investments, gold or insurance, a loan against them may beat an unsecured loan.
- What is the all-in cost? Add the rate, processing fee, guarantee fee and any prepayment charge, and compare lenders on that total.
India offers more small business funding options than most owners use. Government schemes are one route among many, alongside bank and NBFC loans, overdrafts, invoice discounting, equipment finance, borrowing against your own assets, and equity. Match the tool to the need, compare at least two lenders, and check the total cost before signing.
12Frequently Asked Questions
Often supplier credit and customer advances, followed by government-backed loans such as MUDRA and CGTMSE-backed bank loans, and secured loans against assets you own. Unsecured NBFC and fintech loans are usually the most expensive.
Yes. MUDRA loans are collateral-free, and CGTMSE lets eligible micro and small enterprises borrow without collateral through participating lenders. NBFCs and fintech lenders also offer unsecured loans at higher rates.
Digital NBFC and fintech loans often approve within 48 to 72 hours, and loans against gold or securities can be faster. Bank and government scheme loans usually take longer.
Use TReDS invoice discounting through RXIL, Invoicemart or M1xchange. You need a Udyam registration and an invoice approved by your buyer.
Only for short-term purchases you repay within the interest-free period. Carrying a balance is costly, so an overdraft is usually cheaper for ongoing needs.
Take a loan if your business has steady income and you want to keep full ownership. Consider equity if you are scaling fast and can accept sharing ownership and control.
It is not required for every loan, but it is free and widely used by lenders, TReDS platforms and government schemes, so register first.
If you already hold mutual funds, shares or an insurance policy, see how borrowing against them compares to an unsecured loan in Loan Against Mutual Funds vs Personal Loan: Which Is Cheaper in India?
Already hold mutual funds, shares, or an insurance policy?
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sliqfin.com | +91-9136542858 | lasinfo@sliqfin.com
Disclaimer: Rates and scheme terms are set by lenders and the government and change often. Check current terms with the lender or the official scheme portal before applying. This article is general information, not financial advice. Backed by Rainmatter (Zerodha).
